Gov. Arnold Schwarzenegger and the state Legislature are locked in budget impasse over the shape of the budget ahead.
Last Tuesday, Schwarzenegger followed through on his promise to veto a budget that didn't fully resolve the state's crushing deficit issues. He then issued an emergency declaration on Wednesday – the day the new fiscal year began – and expanding the number of furloughs for state workers.
The governor also called a Proposition 58 legislative special session to address the budget, giving them 45 days to solve the crisis, otherwise no other bills will be able to be addressed and they'll be forced to remain in session.
On Thursday, State Controller John Chiang began issuing $776 million in registered warrants – also known as IOUs – to county governments for CalWORKs grants, administration of social services, mental health services and alcohol and drug treatment programs. Counties are mandated to provide those services under state and federal law, according to the California State Association of Counties (CSAC). In February, Chiang also had delayed some payments.
Chiang said the state's “massively unbalanced spending plan” and cash shortfall haven't been seen since the Great Depression, with its $2.8 billion cash shortage in July estimated to grow to $6.5 billion in September. And after that, he said, “we see a double-digit freefall.”
Only those categories determined by the state constitution, federal law and court decisions will receive regular payments this month, Chiang's office reported.
The IOUs are added injury for counties, which already are facing proposed cuts of $4.3 billion, according to CSAC, which said some counties could themselves be pushed to the financial brink as a result.
“We are putting the governor, Legislature and residents we serve on notice that we cannot uniformly ensure the delivery of critical health, public safety and other vital services in the current fiscal
environment," said Gary Wyatt, Imperial County supervisor and CSAC president.
“Let's be clear, services will be disrupted at the local level, and the state's inability to resolve its budget issues is severely impeding counties' ability to meet the needs of the people we serve,” Wyatt said.
CSAC accused the state of pushing its cash crisis down to counties, which it said will be forced to conserve cash by paring down services, such as libraries, parks or road maintenance, or by issuing their own IOUs to vendors in order to make ends meet.
Lake County Administrative Officer Kelly Cox said the state budget agreement approved several months ago included payment deferrals to counties for certain programs for two months, so the county already was anticipating IOUs, which he said are better than standard payment deferrals because of the interest earnings tied to them.
Cox said the state set an interest rate of 3.75 percent on the IOUs on Thursday. He said the notes will mature on Oct. 2.
“That's actually a very favorable interest rate and better than we can do on most of our current treasury investments,” said Cox.
He said the county's primary bank, Wells Fargo, will accept the state's warrants through at least July 10, so there is no immediate impact on the county.
Cox said he doesn't anticipate the state's payment deferrals and IOUs to force the county to borrow from outside sources, because the county's treasury has sufficient funding and reserves.
He estimated that the county's Social Services Department received revenue for July aid payments last month, so they are good until the end of July, and they have other resources to get them through August.
Cox is concerned about deferrals of mental health revenues to the county's Mental Health Department, which already has been operating on a very tight budget. Cox said Mental Health has no ability to absorb additional payment deferrals and will likely require interim financing from another source in the county budget.
With the state under tremendous pressure to bring the budget to a conclusion, Cox said he doubts the IOUs and deferrals will continue for an extended period, and that the county should be able to weather the situation until then.
For Cox and other county officials, the bigger concern is the outlook of a final state budget, which has a laundry list of potentially negative impacts for Lake and its sister counties.
“The county could very well end up with a long-term loss of road maintenance funding, a long-term borrowing by the state of our local property tax revenues, significant amounts of new fees imposed by the state for forensic lab services and other state services that we must use to fulfill our responsibilities, a loss of Williamson Act open space subvention revenues, and major long-term financial implications of changes to the welfare and mental health programs – implications that will result in a substantial shift of costs from the state to the county,” said Cox. “Those are the things I'm most concerned about and anxious to see resolved.”
CSAC said the state is proposing to raid $1.7 billion in local gas tax funds. There also is the proposed suspension of Proposition 1A of 2004, which protects local government revenue.
“Counties are not confident that the state will be able to repay the property tax 'loan' in a timely manner, as the Constitution requires,” the group said in a statement last week.
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